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Hedge Funds Faith in BOJ Easing Fades as Yen Shorts Cut

Photographer: Kiyoshi Ota/Bloomberg

Haruhiko Kuroda, governor of the Bank of Japan (BOJ). “Markets are telling Kuroda, surprise us again just you like did last year,” Masashi Murata, a currency strategist in Tokyo at U.S. broker Brown Brothers Harriman & Co., said by phone on Feb. 25. “The BOJ is running out of options.” Close

Haruhiko Kuroda, governor of the Bank of Japan (BOJ). “Markets are telling Kuroda,... Read More

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Photographer: Kiyoshi Ota/Bloomberg

Haruhiko Kuroda, governor of the Bank of Japan (BOJ). “Markets are telling Kuroda, surprise us again just you like did last year,” Masashi Murata, a currency strategist in Tokyo at U.S. broker Brown Brothers Harriman & Co., said by phone on Feb. 25. “The BOJ is running out of options.”

Hedge funds are losing confidence in Bank of Japan Governor Haruhiko Kuroda’s ability to keep depreciating the yen to boost growth and banish deflation as they wait for a second round of monetary easing to materialize.

Speculators and other leveraged investors have trimmed bearish wagers on Japan’s currency by more than 60 percent since a peak in December. The yen has strengthened 3.6 percent versus its developed-nation counterparts this year, the biggest advance in Bloomberg Correlation-Weighted Indexes and a turnaround from 2013, when it fell the most in three decades.

Kuroda passed this month on the opportunity to increase the 60 trillion yen ($587 billion) to 70 trillion yen the central bank pumps into the economy each year through bond purchases aimed at driving investors’ money offshore. While he’s stopped short of firm promises, the BOJ chief reiterated this month that he “won’t hesitate” to ease policy further to meet the nation’s target of 2 percent inflation by 2015.

“Unless Japan comes up with specific measures to prove it will do whatever is necessary to exit deflation, it’s hard for hedge funds to jump on the weak-yen bandwagon,” Naoki Iwami, the chief investment officer at Tokyo-based hedge fund Whiz Partners Inc., said yesterday in a phone interview. “There’s a big difference in the momentum this year compared to 2013.”

Yen ‘Catalyst’

Iwami expects the yen, which traded at 102.14 per dollar as of 11:41 a.m. in New York, to remain at 100 to 105 in the “short term,” saying that a major “catalyst” would be needed for a decline beyond that level.

The yen has strengthened 3.1 percent against the greenback this year, after falling to an almost 5 1/2-year low of 105.44 on Jan. 2 and sliding 18 percent in 2013, the most since 1979. This year’s advance against a basket of the 10 most-traded developed-nation currencies, including the euro, pound and Australian dollar, followed a 17 percent decline in 2013.

Leveraged funds held 37,429 more contracts betting on yen declines than on gains as of Feb. 18, data from the Commodity Futures Trading Commission in Washington show. That’s down from a nine-month high of 101,900 net shorts on Dec. 3 and 107,295 on March 12, which was the most bearish position since July 2007, just before the outbreak of the global financial crisis.

Yen Options

Options traders turned bullish on Japan’s currency over the past three months, risk-reversal rates show. The premium for three-month contracts to sell the yen against the greenback has fallen while costs for those to buy were little changed, data compiled by Bloomberg show. The difference shifted by 99 basis points to a 73 basis-point advantage yesterday in favor of Japan’s currency, from a 26 basis-point disadvantage as of Nov. 21.

“Investors have sold dollar-yen call options to take profit as the spot rate entered a downward correction,” Hiroshi Yoshida, a senior portfolio manager in Tokyo at MassMutual Life Insurance Co., said by phone yesterday.

Japan’s policy makers were confounded in January as the biggest rout in emerging-market assets since 2009 encouraged investors to seek havens including the yen.

The yen has climbed versus all but one of its 31 major counterparts this year, even as 73 percent of economists in a Bloomberg survey forecast the BOJ will expand stimulus by September. Bond purchases by the central bank tend to devalue money by boosting supply.

The central bank will continue to ease policy to meet its inflation target, Kuroda said in a speech in Nagoya, Japan on Dec. 2. Officials see significant scope for boosting its bond-buying program if necessary, people familiar with the matter, who asked not to be identified, said the same month.

‘Fickle’ Speculators

“The bottom line is, the market expectations in terms of the timing of” additional easing “may very well be disappointed,” Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, said in a phone interview yesterday. “So we are struggling to see too much upside for dollar-yen in the short term,” she said. “Speculative flow is very fickle and it can turn on a dime on any explosion in risk aversion.”

Japan will wait until July to ease policy, when it can judge the outcome of the April 1 introduction of the first increase in the nation’s sales tax since 1997, Shinichiro Kadota, a foreign-exchange strategist at Barclays Plc in Tokyo, said in an interview yesterday.

‘Less Proactive’

“The BOJ will be less proactive this year and act only if inflation or the economy slows after the sales-tax increase,” Kadota said in an interview yesterday. “We expect the BOJ to add stimulus in July, but any delays will slow the pace of yen depreciation.”

Barclays predicts the yen will weaken about 4 percent to 106 per dollar by mid-year, in line with the median forecast of more than 50 strategists surveyed by Bloomberg.

Kuroda was hired in March, charged with carrying out new Prime Minister Shinzo Abe’s election pledge to flood financial markets with cheap money to make exports more competitive and end 15 years of crippling deflation.

The unprecedented easing aimed to depress local government bond yields and drive domestic investors’ money offshore in search of better returns. The central bank left its stimulus program intact on Feb. 18, while increasing low-interest lending to Japan’s banks.

The yield on Japan’s benchmark 10-year bond fell to 0.585 percent today, the lowest among major economies and down from a one-year high of 0.935 percent in May, a month after the easing program was announced.

The BOJ has been less successful in pushing Japanese money offshore. More than 90 percent of Japanese government bonds are held domestically, according to official data, and local investors sold a net 2.91 trillion yen of foreign debt in January, the second-biggest sale in records back to 2005.

“Markets are telling Kuroda, surprise us again just you like did last year,” Masashi Murata, a currency strategist in Tokyo at U.S. broker Brown Brothers Harriman & Co., said by phone on Feb. 25. “The BOJ is running out of options.”

To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net; Kevin Buckland in Tokyo at kbuckland1@bloomberg.net

To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net; Paul Armstrong at parmstrong10@bloomberg.net

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